According to Phoenix Management Services’ Q1/23 Lending Climate in America survey, there is an imminent threat of a slowdown in consumer spending, especially as the IRS has warned Americans to brace for smaller refunds from 2022 tax filings due to the halting of extra tax credits and COVID-19-pandemic-related stimulus payments.

Phoenix’s survey asked lenders how the average consumer will react to these smaller refunds and found that 78% expect consumer spending to dramatically decrease, as pandemic-related liquidity and tax benefits have calmed after inflating normal cash inflow and spending availability. Meanwhile, 22% of lenders believe consumer spending will remain at current levels and expect the ending of the government’s liquidity support will have no impact on spending habits.

The survey also asked lenders how the broader economy will be impacted by the recent collapses of Silicon Valley Bank and Signature Bank. According to the survey, 44% of lenders believe there will not be a risk of a broader ripple effect, while 22% believe the Federal Reserve and the FDIC will backstop customer deposits to prevent any potential ripple effect. The other 33% of the lenders surveyed are concerned that these recent collapses will lead to more regulation and restrict availability to capital (22%) or be the final blow on the way to recession for a U.S. economy that is already dealing with increased inflation and high interest rates (11%).

Additionally, Phoenix’s survey asked lenders to identify how their borrowers are allocating any excess cash. Of the lenders surveyed, 44% expect any excess to go toward building a cash reserve to defend against any further downturn. However, 33% of lenders believe their borrowers will use excess cash to catch up on paying down floating rate debt, while 22% believe their borrowers will use excess cash to invest in growth initiatives.

Lender optimism in the U.S. economy in the near term changed, with the survey’s optimism metric increasing from 1.6 in Q4/22 to 1.78 in Q1/23. According to the survey, 44% of lenders believe the economy will perform at a “D” level during the next six months, while 33% believe the economy will perform at a “C” level. Additionally, lender expectations for the U.S. economy’s performance in the longer term slightly decreased, with the performance expectation metric falling from 1.8 in Q4/22 to 1.78 in Q1/23. Of the lenders surveyed, 78% believe the U.S. economy will perform at a “C” level during the next 12 months.

“Lenders now have precisely the same, sub-par expectations for the U.S. economy in the near term as they do in the longer term — a paltry 1.78. It’s surprising that the near-term grade improved in light of the recent bank failures. This provides further support of the notion that these bank failures will not have a ripple effect in the economy, although we have already seen a more cautious outlook by regulated lenders” Michael Jacoby, senior managing director and shareholder of Phoenix Management Services, said. “With the elimination of pandemic-related stimulus payments and continued inflation (albeit at a slightly reduced trajectory), we think there is still a fair amount of belt tightening by the consumer on the horizon.”